Rich Dad, Poor Dad: Three Lessons

Well, it had to happen sometime. After stirring up a hornet’s nest the last time I discussed Robert Kiyosaki, it somewhat became inevitable that I would review his very well known personal finance book, Rich Dad, Poor Dad. This book has been inspirational to many people, but the book seems to have produced as many critics as champions. What’s really inside those covers? Let’s dig in.

The title Rich Dad, Poor Dad refers to the two main male influences that Robert had as a child. His own father, the figurative “poor dad,” worked at a steady job for a living, while the “rich dad” (the father of a friend) ran a multitude of businesses. Most of this book is told from the perspective of Robert learning from his “rich dad” about how to make money – and seeing how his “poor dad” made huge money mistakes.

The first two thirds of the book covers six lessons taught to Robert by his rich dad. Today and tomorrow, I’ll cover these six lessons, then on Thursday I’ll examine the remainder of the book.

Lesson 1: The Rich Don’t Work For Money

This lesson has an ambiguous title that gives two separate meanings based on how you read it – actually, based on where you put the emphasis. If you read the title as the rich don’t work for money, that’s the wrong one. The rich in fact do work, and they work quite hard. The way the title should be read is that the rich don’t work for money. They work to learn things, and the things they learn can easily be applied to make money over and over again. I agree with this sentiment entirely – good ideas are always more valuable than good labor, because you can keep mining good ideas, while good labor is spent the second you do the work.

Another part of this lesson I liked is that the “rich dad” is actually quite frugal. Although he has a lot of money in the bank, he drives a cheap car and doesn’t live in a mansion. Too many people equate rich with material things, so I enjoy it when it is shown that being rich often has very little connection to material possessions. Being rich means never having to worry about paying your bills – it doesn’t mean driving a Ferrari (well, at least not until you can pay cash for it and not break a sweat).

Without a doubt, this was my favorite part of the entire book, even with the short, out of place rant about the gold standard (actually a misnomer, because the only way the book makes any sense in terms of time is if the rich dad is actually talking about the Bretton Woods system and not the true gold standard) and how the United States was doomed if they abandoned it.

Lesson 2: Why Teach Financial Literacy?

This is the section of the book that causes a lot of controversy when discussed. In a nutshell, this chapter redefines the term asset. For most, an asset is something that has value. For example, your home is an asset because it is something you own that has value.

Well, this section of the book redefines the word. To Robert Kiyosaki, an asset is something that generates income, while a liability is anything that has costs. In other words, by this definition, your primary residence is not an asset but a liability. It may have cash value, but it doesn’t generate income. Instead, assets are forms of passive income that you control, like a rental property or intellectual property.

So what’s the overall lesson here? Basically, you become rich by accumulating assets, assets as defined by this book. This basically means that, in my case for example, my truck is not an asset but The Simple Dollar is an asset (it generates revenue on its own – I write because I enjoy it). Wealth comes from having enough assets that generate enough income so that all of your expenses are covered and there is enough left over to invest in more assets.

Lesson 3: Mind Your Own Business

The point of this chapter is that a financially healthy individual should be spending their spare time not spending their paychecks, but investing as much of it as possible in assets (as defined by this book). This is another lesson I strongly agree with: pay off your debts and start investing as soon as you can into things that can generate revenue. This lesson was short and sweet.

However, tomorrow I’m going to look at some lessons that are a bit more difficult to swallow.

Just to add my 2p.
I have seen criticisms of the second chapter, with people arguing that Kiyosaki wrongly defines an asset. I think thats missing the point that however you define an asset, the way to become rich is to accumulate things that give you an income. BTW this is not the same as having a high net worth.

The lesson I took from chapter 2 is that there are two kinds of assets: the kind where you get money by selling it and the kind where you get money by keeping it. That’s pretty interesting.

The kind where you make money by selling is riskier–it only works if you buy low and sell high. This would include real estate, stocks, and collectibles.

Making money buy owning it works so long as you’re beating inflation and includes stocks that pay dividends, real estate that you’re renting out, and royalties. It also includes other things like tools that let you do things for yourself instead of hiring others, cars that let you get to high-paying but far away jobs, suits that give you the right image to move up in your job, stuff like that. Maybe even things that make you happy (which is fun but also is connected with being more productive, healthier, etc.)

In spite of what this guy says, not everything we own is a liability. It makes sense to compare benefits and costs not only when buying things but also when owning things. If it turns out a car costs a lot to maintain, or the cartridges to our printer are expensive, we may want to switch to another model that still does what we need for a lower maintenance cost.

That’s reading a lot into this chapter, but I wouldn’t have thought to wonder whether I’m making money by keeping vs. selling something until I read this chapter.

I actually like kiyosaki’s definition of an asset… At least – “an asset is something that grows my net worth” – therefore buy lots of assets.
It’s simple, but effective. It’s similar in some ways to the latte factor.. You can spend that $5 on a coffee – or you could spend it on an Asset – that will pay you back later.

Thanks for the great basic coverage here. I’ve had a hold on this book at the library for weeks now. Looking forward to the remaining reports, and the entire 52 financial books in 52 weeks series, it’s a great concept.

Who says your principal residence does not generate income and is therefore a liability?

I know a guy who bought a house in a working class neighborhood about three miles from a large university (he was a recent graduate). While students with money and/or ample parental subsidies paid an arm and leg to rent within walking distance of campus (and the bars), there were always bargain hunters eager to cut their housing costs in half by renting a room in this guy’s house. (Although he nearly always had the house filled with friends and rarely needed an outsider to fill up the house.)

With his rental income, he broke even (thereby living in his house for free) right off the bat, and within a few years, it was indeed generating cashflow.

An owner occupied house is an asset because everyone has to live somewhere and owning a house means you don’t have to pay rent. It’s an implict income (rent avoided) rather than an actual cashflow. But Kiyosakis’ point is good if it stops people buying houses that are too big just because they think it is an investment. You don’t need to buy a house any bigger than the one you would rent if you didn’t own one.

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